How To Optimize
The Design Of Your
Supply Chain Network
A Step-By-Step Guide

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Management Paper: 5 Essential Ingredients for Mathematical Optimization Success

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1How To Optimize
The Design Of Your
Supply Chain Network
Your supply chain network forms
the foundation that your business isbuilt upon. Designing and deploying
a robust supply chain network will
position your company for growth,
while failing to do so can put yourbusiness on shaky ground.
The process of designing a supply chain
network involves critical strategic decisions
that have a huge impact on:

and warehouse facilities, how much to invest
in infrastructure, which suppliers to select, andhow best to distribute goods and deliver services
throughout your end-to-end supply chain.
For decades, mathematical optimization has
been the go-to tool for supply chain network
design. This AI technology is used by companies across the business spectrum – in awide array of off-the-shelf and custom-built
solutions – to automatically determine theoptimal configuration of their supply chains.

Capital investments: When designing yoursupply chain, you need to make major
capital investment decisions on which
manufacturing and distribution facilities
to build and other assets to put in place.

With mathematical optimization, businesses
can make the best possible decisions on how
to design their supply chain networks – so thatthey can ensure long-term, end-to-end efficiency
and profitability.

Supply chain costs: Experts estimate that
network structure determines around 80%
of total supply chain costs – and thus thedecisions you make when configuring yourcompany’s procurement, production, logistics, and transportation network will have asignificant impact on your bottom-line overthe long haul.

In this Guide, we will walk you through the key
steps you need to take to optimize the designof your supply chain network:

Tactical and operational decisions: Allof your company’s planning and decision
making at the tactical and operational
levels – in a whole host of areas including
production planning, transportation mode
selection, safety stock placement, delivery
routing, raw material sourcing, workforce
scheduling – is governed by the strategic
decisions you make when designing yoursupply chain network.
These strategic supply chain network design
decisions, however, are complex – as theyentail complicated (and high-stakes) choices
on matters such as where to locate production

Produced by Gurobi Optimization in collaboration with Haitao Li, PhD, Professor of Supply
Chain & Analytics, College of Business Administration, University of Missouri – St. LouisHow To Optimize
The Design Of Your
Supply Chain Network
Step #1: Identify and analyze
the problems you want to solve
across your end-to-end supply
chain network
The first step you need to take to optimize yoursupply chain network design is to examine andexplore your end-to-end network – so that you
can map the overall framework and flow ofgoods and identify the pivotal, strategic-levelsupply, demand, production, and distribution
problems that you are facing.
After you pinpoint and define these strategiclevel supply chain problems, you will need toanalyze them to gain an in-depth understandingof their:Decision variables: The decisions that haveto be made in order to solve these problems,such as:		
- Whether or not to build new production,		 warehouse, and distribution facilities		 and where they should be located.		
- Which plants to use to manufacture		 goods for various markets.

that you have to meet such as on-time
delivery commitments to customers,
and budget allocations for infrastructure
investments.
As you identify and analyze your strategic-levelsupply chain problems as well as your overall
framework and flow of goods, your end-to-end
supply chain network design will start to reallycome into focus – and you will begin to see
which areas of your supply chain network could
and should be addressed with mathematicaloptimization.
It’s important to note that this first step – aswell as the other steps in this supply chain
network design process – should be undertaken with the cooperation and collaborationof all relevant supply chain subject matter
experts (SMEs) from within your organization
and across your network. In this way, you canensure that you’re able to effectively define
your supply chain problems, efficiently develop
solutions to these problems, and optimallydesign and deploy your supply chain network.		
- Which suppliers to rely on to provide		 parts and raw materials.		
- Which modes of transport to use to		 distribute raw materials and parts, and		 deliver end products to customers.
Business objectives: The numerous (andsometimes conflicting) business goals
that your company is aiming to achieve
such as reducing costs (fixed costs, variabletransportation costs, inventory costs, etc.),
shortening lead times, maximizing efficiency,
and improving service levels.
Constraints: The various business rulesthat you have to follow and requirements

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How To Optimize
The Design Of Your
Supply Chain Network

Step #2: Collect thenecessary supply chain data
Data is the lifeblood of AI technologies likemathematical optimization. Without accessto accurate, up-to-date, and comprehensive
data from across your end-to-end network, it issimply not possible to leverage mathematicaloptimization or any other AI tools in your supply
chain planning.

and distribution operations and from external
suppliers and 3PL providers) and systems(including ERP, MES, and Excel as well as IoTdevices). This often includes but is not limited todata on product demand, capacity of supply, fixed
costs of building and setting up a facility, andvariable costs of transportation.

Before embarking on a supply chain network
design optimization project, it’s essential toensure that you have the capability to collectand process historical and real-time data (in theright quantity and of the highest quality) fromall relevant sources (across your production

This data will not only give you complete pictureof past and current conditions across your supply
chain, but it will also provide the fuel that makes
your mathematical optimization application run –thereby driving optimal supply chain design andstrategic decision making.

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How To Optimize
The Design Of Your
Supply Chain Network

Step #3: Build a mathematicaloptimization model of yoursupply chain network
After you’ve established that you have a firm
grasp of the problems across your supply chain
and have access to the required supply chain
data, it’s time to move on to the next step:
Constructing a mathematical optimization
model of your supply chain network.
This model is a mathematical representation (or,in other words, a digital twin) of your real-world
supply chain network that ideally captures all thevolatility of your supply and demand dynamics
and the complexity of your sourcing, production,and distribution operations.
When you build a model, you define your endto-end supply chain problems – their decisionvariables, business objectives, and constraints –in mathematical terms using modeling softwaretools. Many companies have in-house analytics
specialists and data scientists who are capableof constructing such a model, while othercompanies opt to engage external consultants
and academic researchers or leverage userfriendly, off-the-shelf modeling platforms to help
them with the modeling process.
Throughout the process of building the mathematical optimization model of your supply chain
network, you should:
Involve all relevant stakeholders, decision
makers and SMEs from within yourbusiness and across your supply chain.
Test and validate the model to ensure thatit accurately reflects your present-day
business environment and encapsulates
your procurement, production, anddistribution problems and decision
making processes.

Balance the tradeoff between model
complexity and the computational efforts
needed to find quality solutions.
Adjust and adapt the model – so that it
encompasses the constantly changing
supply and demand conditions acrossyour supply chain network.

Step #4: Generate an optimal
supply chain network design
Now that you have formulated your model,
you are ready to begin using mathematicaloptimization to design an optimal supply chain
network and drive optimal strategic decision
making across your supply chain operations.
To achieve this, all you need to do is:
Feed your model up-to-date data fromacross your supply chain network.
Fuse your model with a mathematicaloptimization solver (an algorithmic problem
solving engine, which will read the modeland automatically generate an optimal
supply chain configuration, taking into
account your numerous decision variables,
business objectives, and constraints).
Use the output of the mathematicaloptimization application – your optimal
supply chain network design – to gain
visibility and control over your network,
evaluate cost and service-level tradeoffs,
and decide on the best courses of action
to achieve your business goals.

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How To Optimize
The Design Of Your
Supply Chain NetworkStep #5: Conduct scenario
analysis to discover andassess supply chain risks
and opportunities
Generating an optimal supply chain network
design is not the end of the story – as, in orderto realize the full benefits of using mathematicaloptimization to configure your end-to-end supply
chain, you should leverage the AI technology’s
robust scenario analysis capability.

Examine and evaluate these scenarios to
uncover risks and opportunities throughout
your supply chain network and asses new
product and market opportunities, supplier
relationships, inventory strategies, andpotential infrastructure investments.

Indeed, the optimal supply chain network
configuration produced by your mathematicaloptimization application forms the base casescenario, but you can:Use the insights and intelligence from yourscenario analysis to drive optimal strategicplans and decisions and optimal long-termbusiness outcomes.

Rapidly create countless other what-if
scenarios (including supply, demand,production, distribution, inventory, investment, industry, and macroeconomic
scenarios) to assess their potential
impact on your business.

With mathematical optimization’s scenario 		
analysis capability, you can proactively planfor the future and ensure your supply chain 		
network is designed to succeed – today andin the years to come.

For more information, visit Gurobi.com, email us at info@gurobi.com, or call +1 713-871-9341

How To Optimize
The Design Of Your
Supply Chain Network

Design, decide, and deliver withmathematical optimization
Your supply chain network design can make or
break your business: A poorly designed network
can be a source of increased supply chain costs
and risk and decreased operational efficiency
and customer satisfaction, while an optimallydesigned supply chain network can be a driverof long-term competitive advantage andrevenue growth.
Using mathematical optimization, you can:Design an optimal supply chain network,
gain end-to-end visibility and control, andevaluate numerous what-if scenarios.
Decide on the best courses of action toachieve your strategic business objectives.
Deliver product and service excellence
for your customers and increased profit
margins for your shareholders.

For more information, visit Gurobi.com, email us at info@gurobi.com, or call +1 713-871-9341

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info@gurobi.com

Management Paper: 5 Essential Ingredients for Mathematical Optimization Success

1 (713) 871-9341
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